Sebi challenges SAT order on Takeover Code

The Securities and Exchange Board of India (Sebi) today moved the Supreme Court challenging the decision of the Securities Appellate Tribunal (SAT) that held that financial investors like PEs and VCs do not acquire controlling stake in a company by just picking up more equity.

In January, SAT set aside a Sebi direction that held that the veto rights acquired by a financial investor in a target company cannot be construed as a controlling stake.

An apex court bench, comprising the new chief justice SH Kapadia and justices KS Radhakrishnan and Swatanter Kumar, directed both parties to file their written submissions.

The market regulator was represented by Attorney General GE Vahanvati.

The case assumes significance as it will provide clarity on the nature of investments made by financial investors such as PEs and VCs which typically seek protective interest in their target companies.

The apex court decision will also have implications for the Sebi Takeover Code. Financial investors are uneasy about seeking veto rights in listed companies for fear of triggering the requirement to make an open offer under the Takeover Code.

The SAT ruling came over a petition filed by Subhkam Ventures, a private equity investor, which challenged the Sebi direction to go in for an open offer on the grounds that it violated the provision of the takeover norms by getting the veto right in the target firm MSK Project. Subhkam had acquired over 15 per cent in MSK Projects, triggering the requirement of making an open offer under Regulation 10 of the Takeover Code.

However, Subhkham contended that it was merely a financial investor and acquisition of more stake would not result in a change in the control of the company under Regulation 12 of the Takeover Code. But Sebi rejected the contention of Subhkam and ordered it to revise its offer document in accordance with Takeover Code.

Following this, Subhkam moved SAT, which set aside the Sebi direction, saying the veto right did not amount to control of the company.